Emerging Trends in Real Estate® Europe 2006 - Urban Land Institute

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The Dublin market is its own internal engine. Growth continues to be impressive; it Exhibit 3-7 Prospects for the Barcelona Real Estate Market in 2006 Prospects Rating Ranking Risk-Adjusted Total Returns Modestly Good 5.9 5th Total Returns Modestly Good 6.1 2nd Risk Modestly Low 5.7 14th Rent Increases Modestly Good 5.8 3rd Capital Growth Modestly Good 5.9 3rd Supply/Demand Balance Modestly Good 5.6 2nd Development Modestly Good 5.8 4th Investment Recommendation of Survey Respondents Office Retail Industrial/ Distribution Buy Hold Sell 48% 41% 11% Buy Hold Sell 55% 34% 11% Buy Hold Sell 68% 19% 14% Source: Emerging Trends in Real Estate Europe 2006 survey. value and with prime office yields at 5 percent, which is ten basis points lower than Paris, it is definitely too hot for some. Others continue to find Barcelona appealing and point to opportunities for refurbishment, whether offices or residential. Respondents believe the fringe and out-of-town market will continue to do well in 2006. Demand has picked up, supply is in check, and rents are favourable to prospective tenants. Second-tier-city syndrome is also hitting Spain. Respondents mention Valencia and Malaga as high-growth areas that are attracting interest from international investors that in the past considered only Barcelona and Madrid. In these second-tier cities, they say, pricing has not adapted to reflect the growth prospects. Barcelona industrial jumps to third place in 2006 in terms of buy recommendations, compared with mid-range mediocrity last year. Respondents talk of good prospects in areas where main communication centres link Madrid to Barcelona. Interestingly, retail sparks little interest anecdotally and it is a stable-to-down market, unlike office or industrial. However, more than 50 percent say it warrants a buy rating, if the opportunity arose. 34 Emerging Trends in Real Estate ® Europe 2006 Stockholm Stockholm’s prime yields continued to fall in 2005, driven by a competitive investment environment and an increase in the number of investors from Norwegian and Danish property firms. Declining office vacancy rates are positive, although still higher than levels seen during the late 1990s. A “jobless” recovery in 2006 coupled with increased construction risks may dampen future investment capital flows. Respondents overwhelmingly choose “buy” or “hold” for each property type in Stockholm for 2006. City risk ratings are favourable, while capital growth and development ratings are fair. Speculative office developments in 2006 may signal future supply/demand imbalance in the office market. Interviewees from the Nordic region mention hotels, mixed-use, and industrial property types as alternative investment and development opportunities in Stockholm in lieu of the aggressive office sector. Exhibit 3-8 Prospects for the Stockholm Real Estate Market in 2006 Prospects Rating Ranking Risk-Adjusted Total Returns Modestly Good 5.9 6th Total Returns Modestly Good 5.6 13th Risk Modestly Low 6.2 6th Rent Increases Modestly Good 5.5 7th Capital Growth Fair 5.3 13th Supply/Demand Balance Fair 4.7 21st Development Fair 5.1 18th Investment Recommendation of Survey Respondents Office Retail Industrial/ Distribution Buy Hold Sell 48% 43% 9% Buy Hold Sell 45% 45% 10% Buy Hold Sell 40% 44% 16% Source: Emerging Trends in Real Estate Europe 2006 survey. Dublin The Dublin market is its own internal engine. Growth continues to be impressive; it is down from the high levels of the late 1990s but continues to outpace Europe, with a higher growth rate expected in 2006. More important, the strength is domestic, with less reliance on foreign direct investment and more economic generation of indigenous companies.
is down from the high levels of the late 1990s but continues to outpace Europe. Exhibit 3-9 Prospects for the Dublin Real Estate Market in 2006* Prospects Rating Ranking Risk-Adjusted Total Returns Modestly Good 5.8 7th Total Returns Modestly Good 5.7 11th Risk Modestly Low 6.0 8th Rent Increases Modestly Good 5.6 6th Capital Growth Fair 5.3 17th Supply/Demand Balance Fair 5.1 7th Development Fair 5.2 14th Investment Recommendation of Survey Respondents Office Retail Industrial/ Distribution Buy Hold Sell 22% 44% 35% Buy Hold Sell 20% 55% 25% Buy Hold Sell 18% 59% 23% Source: Emerging Trends in Real Estate Europe 2006 survey. * Fewer than 20 (but no fewer than 14) survey respondents rated this city on some measures. Domestic demand and capital sources are also the engine of Dublin’s investment and lettings markets. Three years of sluggish conditions in the office sector turned round in 2004, and early indications are that respondents expect sustained demand through 2006, once again primarily from domestic firms. Office vacancy declined from 13.8 to 11.3 percent during the year ending in the third quarter of 2005. Drawbacks for 2006 are that deals are starting to take longer to transact as negotiations are prolonged by fighting over incentives. In some sectors, particularly manufacturing, Irish companies are facing competitive pressures from overseas firms. In the office market, strong lettings continue to drive rental and capital growth, fuelling investor demand. Once again, the majority of the investors are locals. Other Europeans are interested but continue to find themselves outbid by strong local buyers. Office property yields as of third-quarter 2005 were—together with London—the lowest in Europe at 4.5 percent. Retail properties have been in demand, but prices are now quite high, with high-street retail yields now at the nearridiculous level of 3 percent. These yield levels are undoubtedly among the prime reasons that survey respondents do not give a high buy recommendation for Dublin retail, suggesting that holding is the best strategy for 2006. Supply is curtailed, with restrictions on large-scale schemes, but European retailers continue to want to get into the high street in an effort to capture the spending power of the young age profile in Dublin. Any worries in this sector are out of Dublin, with concerns that the amount of retail warehousing in provincial cities will be realised. Investor interest in the hotel market may well tail off from 2005 levels as tax incentives designed to stimulate development end, with qualifying projects needing to be finished by July. Irish buyers’ reputation is just as strong overseas, but for some it may be time to realise the gains, despite its seventh-placed ranking for total returns among European cities. As one respondent says: “Dublin is very strong and may be a sell to buy elsewhere.” One interesting note on Dublin: the sell recommendations for office, retail, and industrial are above average when compared with other markets. Are the high sell recommendations a market signal that the property cycle has peaked, or an opportunity for foreign investors to buy from willing domestic owners? As yields for office, retail, and industrial properties in Dublin are the lowest in Europe, according to CB Richard Ellis, investors will need to bank on growth in rents, rather than further yield compression, to achieve attractive returns in 2006. Lyon Lyon punched above its weight in last year’s return-adjusted prospect rankings and it is just about holding its own again this year. It has dropped four spots to eighth place and, while it is still named by many as a top ten favourite prospect, this is countered by talk of competition and increasing prices. In 2006, Lyon continues to head the pack of second-tier French Exhibit 3-10 Prospects for the Lyon Real Estate Market in 2006 Prospects Rating Ranking Risk-Adjusted Total Returns Modestly Good 5.8 8th Total Returns Modestly Good 5.9 6th Risk Modestly Low 5.6 15th Rent Increases Fair 5.3 9th Capital Growth Modestly Good 5.9 4th Supply/Demand Balance Fair 5.4 5th Development Modestly Good 5.7 6th Investment Recommendation of Survey Respondents Office Retail Industrial/ Distribution Buy Hold Sell 64% 28% 8% Buy Hold Sell 68% 24% 8% Buy Hold Sell 64% 24% 12% Source: Emerging Trends in Real Estate Europe 2006 survey. Emerging Trends in Real Estate ® Europe 2006 35
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